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Other taxable income includes alimony, state or local tax refunds, retirement fund
distributions from individual retirement accounts (IRAs) and/or pensions,
unemployment compensation, and a portion of Social Security benefits.
Your total income is then adjusted for items that the government feels should not be
taxed under certain circumstances, such as certain expenses of educators, performing
artists, and military reservists; savings in health savings or retirement accounts; moving
expenses; a portion of self-employment taxes; student loan interest; tuition and
educational fees; and alimony paid. Income that is not taxed by the U.S. government
and does not have to be reported as income includes the following:
- Welfare benefits
- Interest from most municipal bonds
- Most gifts
- Most inheritance and bequests
- Workers compensation
- Veteran’s benefits
- Federal tax refunds
- Some scholarships and fellowships
It’s important to read tax filing instructions carefully, however, because not everything
you’d think would qualify actually does. The government allows adjustments to be
reported (or not reported) as income only under certain circumstances or up to certain
income limits, and some adjustments require special forms.
The result of deducting adjustments from your total income is a calculation of your
adjusted gross income (AGI). Your AGI is further adjusted by amounts that may be
deducted or exempted from your taxable income and by amounts already credited to
your tax obligations.
Deductions, Exemptions, and Credits
Deductions and exemptions reduce taxable income, while credits reduce taxes.
Deductions are tax breaks for incurring certain expenditures or living in certain
circumstances that the government thinks you should not have to include in your
taxable income. There are deductions for age and for blindness. For other deductions,
there is a standard, lump-sum deduction that you can take, or you may choose to itemize
your deductions, that is, detail each one separately and then calculate the total. If your
itemized deductions are more than your standard deduction, it makes sense to itemize.
Other deductions involve financial choices that the government encourages by
rewarding an extra incentive in the form of a tax break. Home mortgage interest is a
deduction to encourage home ownership, for example; investment interest is a
deduction to encourage investment, and charitable donations are deductions to
encourage charitable giving.